Smaller Deals in Focus as Big Private Equity Fades in Africa

A family-owned grocery chain selling lychees and almond milk would have been an unlikely target when giant private equity funds were spending big in Africa.

But as times have got tougher for investors, small and midsize businesses like Food Lover’s Market are making up the bulk of deals on the continent.

Two years ago, an $8.1 billion investment spree by some of the world’s biggest private equity funds led to expectations that Africa would feature strongly in their portfolios.

U.S. giant KKR made its first investment in the continent, putting $200 million into Afriflora, a flower company in Ethiopia. Carlyle put money into Nigeria’s Diamond Bank while Permira backed a management buy-out of South African data center firm Teraco Data.

But with falling commodity prices dragging down growth, some of these deals are souring, big money flows have dried up, and firms are finding it harder to sell or float their investments.

Standard Chartered has halved its private equity team in Africa in recent months as it looks to sell-off its assets following a number of disappointing deals.

The total value of private equity deals in Africa during the first half of 2016 was just $900 million, according to the African Private Equity and Venture Capital Association (AVCA).

“You need to be a bold investor today,” said Andrei Vorobyov, a partner in Bain & Company’s Johannesburg office.

“I don’t think anybody predicted such a decline in commodity prices.”

Nigeria, Africa’s largest economy, fell into recession for the first time in 25 years in the second quarter of 2016, while business confidence in South Africa was at its lowest in three decades in September.

Yet while big buyouts are out, the number of smaller private equity deals in Africa is rising as investors pick off opportunities too small for global funds, AVCA data shows.

Around 75% of deals in the first half of 2016 were below $250 million, with most below $100 million. In 2014, around 70% of funds went on buyouts of more than $250 million.

A $54 million investment by emerging market private equity firm Actis in Food Lover’s Market (FLM), a niche South African chain with 128 stores in 11 countries and $750 million in revenues, is typical of the deals which are closing despite slowing economic growth and depreciating currencies.

“This business is right in the sweet spot of our investment strategy in the sub-Saharan African market. The demand for modern retail is no different for a Kenyan consumer than someone sitting in the UK,” said David Cooke, a director at Actis, which plans to triple the size of FLM in five years.

Carlyle closed its first sub-Saharan African fund in 2014, raising $698 million. Two years on a good deal of the money has not yet been invested.

Eric Kump, the fund’s co-head, told Reuters, that more than 50% of the fund would be invested by the end of the year, without saying how or where that would be done.

Carlyle’s 2014 investment in Diamond Bank is underwater, with its stock price down around 90% in dollar terms since the transaction.

KKR began building a dedicated team for Africa in 2013 but so far the Afriflora deal is its sole investment. TPG, which makes midsize investments in Africa through a partnership with Satya Capital, has bought nothing since October 2015 when it invested in a schools business. TPG and KKR declined to comment.

As well as economic uncertainty, industry experts say it is still difficult to find investments in Africa on the scale the big funds would like.

AVCA estimates 40% of the funds raised in 2015 have been spent out of a record $4.3 billion fundraising.

Traditional private equity funds also face the constraint of having to cash out of investments at specified times—often within three years and preferably at attractive enough return levels to tee them up for fresh fundraising.

That type of investment period does not usually work in Africa said Riaz Currimjee, founding partner at Surya Capital, an East African-focused investment firm.

“Things take longer. A five-year investment is not long in frontier markets,” he said.

The undeveloped state of many of Africa’s stock markets as well as volatile currencies add to the difficulties firms face in selling their investments at the right time.

According to an AVCA survey of investors, currency risk is the biggest obstacle to African private equity.

The South African rand hit record lows against the dollar early this year – making it harder for firms that invested in the country two years ago and are approaching the usual exit period to make their move.

Since Permira invested in Teraco Data in December 2014 the rand has fallen more than 20% against the dollar. The firm declined to comment on the deal’s status.

Countries across the continent have restricted dollar use and imposed other capital controls since the emerging markets slide, further deterring foreign investment.

But Andrew Newington, chief operating officer at Actis, said his fund had no plans to retreat from Africa.

“These are big countries and they’re growing. These markets are not going anywhere. We are committed to them through their cycles.”

Congo’s Kabila Consolidates Local Control in Governors’ Elections

Allies of Democratic Republic of Congo President Joseph Kabila won 14 of 19 provincial governorships decided on Saturday, the election commission said, shoring up the president’s local support despite calls to step down this year.

The elections, which opposition leaders say were rigged in Kabila’s favor, are expected to solidify the president’s control over local security forces and resources ahead of a presidential election scheduled for November.

Kabila, who succeeded his assassinated father in 2001 and won disputed elections in 2006 and 2011, is barred by the constitution from standing for a third elected term, though opposition leaders say he intends to extend his rule.

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The elections were for interim governors voted into new provinces created in July as part of a decentralization initiative. The winners will hold the positions until permanent governors are voted in by new provincial assemblies. But the timing for the creation of the new assemblies is unclear – they were initially scheduled for last October but have been delayed.

Corneille Nangaa, president of the National Independent Electoral Commission, said that independent candidates won the other five governorships. Voting in one province could not be organized on time and a run-off is required in a second.

Some leading opposition parties declined to field candidates, dismissing the elections as pre-arranged. Candidates from opposition parties that recently defected from the majority were rejected by the courts following objections from the ruling coalition.

World’s first malaria vaccine, from GlaxoSmithKline, wins approval from EU

The world’s first-ever malaria vaccine, developed by GlaxoSmithKline, has won backing from European regulators, marking a critical step in the fight against a disease that kills nearly half a million people each year.

Mosquirix, also known as RTS,S, has been in development for 30 years. It initially started as a concept within Glaxo; over the years, the Walter Reed Army Institute joined in on clinical development, and the Bill and Melinda Gates Foundation contributed more than $200 million in financing. In all, more than $565 million has been invested to create the vaccine.

“This is a historic achievement,” said Moncef Slaoui, head of Glaxo’s vaccine division, who has worked on the vaccine for 27 years. “Especially in the U.S., so many diseases are so effectively controlled by vaccines that we forget their power. But, when children die too commonly, you realize that vaccines are transformational.”

Malaria is caused by parasites that are transmitted to humans via the bites of infected mosquitos. The disease caused an estimated 584,000 deaths in 2013, and most of those were among African children. Malaria deaths have fallen by 47% globally since 2000 thanks to greater prevention efforts, including insecticide-treated nets, indoor spraying with insecticides, and better diagnostics and drugs for treatment.

Courtesy of GlaxoSmithKline

The EMA approval is the first major step to bringing the vaccine to the public. Under World Health Organization guidelines, such an approval is needed before the organization can recommend its use. EU sign-off also makes approvals easier in individual African countries, where malaria runs rampant. WHO is expected to provide its policy recommendations by November 2015, wrote WHO spokesman Gregory Hartl in an emailed statement.

“WHO’s policy recommendations take into account several additional factors not addressed by regulators,” wrote Hartl. “These include feasibility of implementation, affordability and cost-effectiveness.”

The final Phase III study of Mosquirix, which is what the EU group used to determine its decision, included more than 16,000 children across seven African countries. It was given to both infants, aged 6 to 12 weeks, and toddlers, aged 5 to 17 months, and included the initial vaccine and up to three booster shots.

The vaccine regimen reduced the number of malaria cases by 39% in toddlers and 27% in infants, the company said. More important, since a child can get malaria multiple times within a single year, the vaccine prevented 6,000 cases per 1,000 vaccinated children over four years in areas of Sub Saharan Africa with the highest incidence of the disease.

The trials were conducted under optimal circumstances, where children also benefited from prevention efforts like bed nets and vigilant screening for signs of the disease. In environments where prevention protocols are not as strong, the vaccine could have an even more powerful effect and protect a greater percentage of those who received it, said Slaoui.

Mosquirix is the first vaccine of its kind to fight a parasite. Up until now, vaccines have been directed at viruses and bacteria. “Parasites are very elaborate pathogens,” said Slaoui. “Vaccines to fight parasites haven’t been approved until now because it really required cutting-edge technology.”

The vaccine targets T cells, part of the body’s immune system, leveraging those cells to find and destroy the malaria parasite; in that way, Mosquirix works differently from most vaccines, which use antibodies to prevent diseases. The innovative technology also has potential beyond malaria; Glaxo has used the breakthrough to develop a vaccine for shingles that’s shown high efficacy across age groups.

Mosquirix is a first-generation vaccine, said Slaoui. Glaxo is already working on a second generation vaccine that could be even more effective. Slaoui says researchers, it’s expected to enter trials within the next 12 to 18 months. Glaxo will sell the current vaccine at cost plus a 5% markup; the profits will be reinvested in research of underfunded tropical diseases.

Cost of Ebola for West Africa far lower than once feared

An aggressive response to the Ebola epidemic in West Africa has reduced a massive $32.6 billion economic tab initially forecast by the World Bank, a top official at the organization said Wednesday.

Francisco Ferreira, the World Bank’s chief economist, said at a lecture in Johannesburg that the outbreak’s total financial toll in the region could fall between $3 billion and $4 billion, according to Reuters. Ferreira pointed to successful efforts to contain the disease in some West African countries as a sign that the World Bank’s worst-case scenario is unlikely. But, he also warned that Ebola could still spread if those efforts are not maintained.

“It has not gone to zero because a great level of preparedness and focus is still needed,” Ferreira said, according to Reuters.

In its latest report on the global Ebola epidemic, the World Health Organization counted 5,177 deaths out of 14,413 reported cases of the disease. Liberia has seen the most deaths by far, at greater than 2,800, followed by Sierra Leone and Guinea at more than 1,000 each. The United States has had four reported cases of the disease and one confirmed death.

This year’s outbreak has affected businesses in West Africa and worldwide. A number of airline stocks dipped last month following reports that a potentially-infected woman had flown from Cleveland to Dallas on Frontier Airlines. Meanwhile, the stock market in general suffered in October, in part due to investor concerns over the spread of the disease.